governance, political economy, institutional development and economic regulation

Posts tagged ‘make in India’

RBI Governor Raghuram Rajan got it horribly wrong when he amended PM Modi’s “make in India” program by adding a “make for India” byline in his FICCI address yesterday.

What on earth could he have meant? Was he implying that the domestic economy should be further insulated from foreign competition? That is the only way domestic industry can be induced to make only for India, rather than for the World, including India?

How does this “home centric” approach fit with his view, reiterated in the same FICCI event, that the economy needs to be more open. In an open economy business “makes” for markets worldwide because production and value chains are transnational and product standards, designs and prices converge across the globe squeezing out fat.

Indian industry did “make for India” pre the 1991 liberalization. The result was a small, fat big-business set; high prices; shortages and shoddy goods. The biggest achievement of liberalization is a convergence of product standards towards international levels because of import competition and the ample and ready availability of goods- except where government erroneously continues to believe that fixing maximum prices for goods and services can work. It does not, as we can see in electricity supply and now in drugs and pharma where shortages are resurfacing.

Exhorting Indian industry to restrict itself to the domestic market is an ominous sign of the export pessimism rampant in the pre-liberalisation period. Does this also mean that Governor Rajan will keep the INR unreasonably strong to keep imports (petroleum products) cheap at the expense of export competitiveness?
Surely the defence manufacturing we are initiating is not just meant for domestic consumption. Unless Indian armaments are in regular use in conflicts and wars internationally, how can we possibly be sure of their quality or get the “consumer” feedback for quality enhancement?

Maybe Rajan’s “rock star” status as an economic wizard got the better of him. After all, PM Modi’s penchant for acronyms and by-lines has now become national mania, rendering intelligible conversation impossible, littered as it now is, with 3AAA and 5Cs. But trying to best the PM can be fatal, even for an outstanding, independent regulator. Even the US President would look askance at the Fed. Chair speaking, out of turn, outside her circumscribed official ambit.

But on matters more related to his current charge, he got things right, as usual. In a downturn, especially with inefficient and wasteful government machinery, it is a better to leave income in the hands of the earner rather than transfer it to government via higher tax rates. The “income effect”, enhanced by the low inflation target of Gov. Rajan, induces consumers to spend and feeds into demand led private investments which is good for jobs and growth.

The conundrum, if tax rates are to be relaxed or if tax exemptions for savings enhanced, is how to balance the budget?

Here is a list of the “low hanging fruit” available.

First, our traditional expertise in going around with a begging bowl is best. PM Modi is prescient in aggressively seeking external grants and concessional funding from the word go. The challenge now is converting pledges into cash flows.

Second, ruthlessly cut revenue expenditure, particularly on general administration. This is a necessary “evil” to show that the government means business.

Third, our annual public investments are barely 12% of total expenditure. This requires stopping gold-plated construction and using the existing space better. Witness the new, palatial External Affairs Office complex in Delhi, which remains underused because it is far from the South Block-located-PMO. Anyone housed in the new office attracts the unwelcome tag of being farther from the powers-that-be than even the mother ministry.

Using the available space rationally, simply by squeezing government servants together can help. Today, senior officers occupy office rooms often much larger that the living room of their government allotted homes. Notice how even mid-level government officers do not work in “row cubicles”, as in private firms and there are no common-use spaces for work meetings. Every office is designed to accommodate a “durbar” suitable in size for the concerned officer – this is reminiscent of the hierarchy of “Princes”, established by the “Raj”, based on the number of guns fired in salute of a Prince.

Slashing perks like liberal use of office provided phones and cars and a cut on travel budgets are also necessary, albeit symbolic measures, for flagging the need for economy.

Fourth, more substantively, using the existing government investment in State Owned Enterprises (SOEs) more aggressively can help. For starters, increase the dividend payout ratio from 44% to 66%. This adds around Rs 25,000 crores to revenue – only 1.4% of the total budgetary resources – but sufficient to increase the central plan expenditure by a hefty 25%.

Higher payouts and consequential constrains on accessing internal resources will also force SOEs to become leaner and look for alternative PPP models for financing operations and investments. Listing more SOEs on the stock exchanges and launching an aggressive privatization program can leverage the economy; attract foreign and domestic private investment and create more fiscal room for Greenfield public investments.

Governor Rajan in right in predicting strained economic circumstances in the near term. But hiding behind the default option of producing only for our huge domestic market and hapless domestic customers, is not the answer – nor is tight market segmentation between the domestic and overseas markets possible. God save us from anyone advocating a back-to-the-future strategy of turning resurgent India into a fortress.

Like this:

Will we veer away from the soaring flyovers; highways straight as Arjun’s arrow; high rise apartments and carefully “zoned” areas, typical of planned development and turn instead towards the squiggly, irregular lines so dear to the foreign tourist, of “charming”, little, oriental streets; buildings leaning precariously into each other; roads not wide enough to turn around a decent sized car; gloomy, shaded rooms looking inwards onto resplendent, inner courtyards with shops, factories, homes, schools and hospitals all thrown higgledy-piggledy together in the best tradition of “organic growth” fueled by private money?

Unlikely, because even the most ancient, known, Indian city-Mohenjo Daro- built in the 25th century BC was based on a rectilinear street grid (now in Pakistan) and is completely at variance with the more recent, albeit charmingly romantic, memories of traditional Indian living.

If the ancient past was at variance with recent memories, the present is rapidly evolving. Indian values and needs are changing in response to the open economy framework adopted since 1991 and the associated diffusion of technology, competition and choice. The change is so rapid that formal institutions have yet to catch up.

Neither our laws, nor our judiciary caters to the frustration of young Indians with the plethora of “limiting”, formal traditions.

Take for instance, the case of gays, lesbians and trans-genders. Our law demonises them. But most Indians are easy about adapting to them in the same way “hands-off” manner as they good naturedly, accept foreign customs, like opening doors for women ( a custom rapidly becoming extinct in the West); as a quaint sub text of life.

Cross religion marriages is another example. It is not the norm but is generally accepted if neither family objects. Young India takes to anything modern with a vengeance. Hafiz Contractor’s lurid architecture; skin fit jeans; soppy “friends” style TV serials; head banging, electronic music, offensively fast food and horribly over-priced lounges.

The rapid economic growth associated with these aspirations has usually been scaled up, to encompass the middle class, only by planned investments and heavily regulated economies, as in East Asia. The downside has been rapid grow in pockets of affluence; carefully screened off; insulated from the sordid reality of the poor. Planning to skillfully create a bubble of affluence, access into which is carefully monitored for those make the bubble real but who are excluded from the bubble, except as service providers.

But if Plans and Rules cater only to the rich does it really matter if we stop planning? Even if a random approach is adopted for public investment management there is a 50% chance that investments will benefit the rich and the poor equitably. In contrast, the Impact Assessment of Planned Programs for the poor does not have a better “hit rate” so who cares?

For starters, let us recognize that the death of Planning is not new. It died a quarter of a century ago when the Berlin Wall fell in 1989.

First, the planned share of private sector in investment has been increasing with every plan and was at 50% of total investment in the last Plan. So irrespective of how much money the government invests, so long as the private sector meets its targets we could hit at least 50% of the growth target so long as the government ensures a facilitating investment environment.

Second, public investment spend comprises just 21% of total public expenditure every year. The rest goes towards meeting the existing recurrent liabilities of interest (33%) salaries (8%) and other operating expenditure just to feed the public “beast”. Rather than increasing public investment by increasing taxes, far better to leave the surplus with private actors and encourage them to invest.

Third, of the 21% which is available for public investment there is no easy way of knowing how much needs to go for funding completion of ongoing projects and what then is the residual fiscal space for new projects. It is telling that even the Union Government budget documents are not transparent about this important distinction in resource allocation.

The suspicion is that if Fiscal Deficit targets are to be achieved there is very limited fiscal space for new projects. A careful inventory of approved but unfinanced projects could reveal a project stock as high as investment spending over the next five years. This is not new and explains why the practice has been to spend on new projects by starving existing ones, so as to please the largest number of political constituencies.

Remember that incomplete road outside your window which rakes up columns of dust every time a motorcycle zips by? Well the reason why the engineers, you curse daily, are taking so long to complete it, is that money for a road or any other project is not allocated and frozen at the time the project is approved. Allocations lapse at the end of the year and fresh allocations made against which cash is released piece meal, depending on the relative power of conflicting political constituencies.

Fourth, planning died because Planners did not reciprocate the faith put in them by citizens. They “gold plated” projects (Commonwealth Games); failed to anticipate technological change and innovation (Public Transportation) and thereby created huge stockpiles of inefficient and unsustainable assets, financed by public debt.

PM Modi probably knows this and consequently is no hurry to devise a new planning set up. Of course every government wants to leave its “footprint” encrusted in projects. The Modi government is no different, if one is to judge from the bouquet of projects hurriedly announced and allocated notional amounts in the 2014 post-election budget.

The only hope this time around, is that there may be more emphasis on creating a facilitating environment and encouraging the private sector to invest rather than using public funds to determine the future.

The test case will be Defence Production. If the government can get the domestic and foreign private sector to invest in “make in India”, against buy back assurances, we shall be starting on an even keel. Nothing much there for the poor to cheer, except some trickle down in construction and services, but at least the middle class can look forward to more jobs and better wages.